Bakkt Holdings, Inc.

Greetings and welcome to the BACC Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference call is being recorded. I will now turn it over to Anne DeVries, Head of Investor Relations at BACC. Please go ahead.

Good morning and thank you for joining us for BACC's Third Quarter Earnings Call. Today's presentation, including the separate earnings call presentation that can be found at our investor relations website at www.investors.bact.com, will contain certain forward-looking statements about BACT. These statements are based on the current expectations of the management of BACT and are subject to uncertainty and changes of circumstance, many of which are beyond BACT's control, which may cause actual results to differ materially from those expressed or implied in such forward-looking statements. For more complete discussion on forward-looking statements and the uncertainties related to BACT's business, Please refer to its filings with the Securities and Exchange Commission, including the discussion of BACs risk factors and its most recent annual report on Form 10-K and its subsequent quarterly report on Form 10-Q. During today's presentation, in addition to discussing results that are calculated in accordance with generally accepted accounting principles, we refer to certain non-GAAP financial measures. For more information on this, the basis of presentation for our financial results and our non-GAAP measures, please refer to our earnings release, which was filed this morning with the SEC. Joining me on today's call are Gavin Michael, Chief Executive Officer, and Karen Alexander, Chief Financial Officer. After our prepared remarks, we will answer questions we receive from our investors through the SAIT Technologies platform. After that, Gavin and Karen will be available to answer questions from the analyst community. I'll now turn it over to Gavin.

Thank you, Anne. Good morning, everyone, and thanks for joining us. Our goal remains the same. we're working to connect the digital economy by enabling consumers, businesses, and institutions to unlock value from digital assets. Within our core focus, our strong market position enables us to invest through the cycle, like with our acquisition of Apex Crypto, which we expect to be transformative for Bakkt, and we'll discuss later in the call. We recognize that there are still significant economic headwinds for consumers and businesses, from inflation and rising interest rates to the continued volatility, both in traditional markets and in crypto. Looking at the events in crypto this week, we can see that the shockwaves are continuing and the fallout may not be limited to the initial parties involved. We have no exposure to FTX or any of the impacted parties or tokens. We are focused on building for the long term in a sustainable way. we've always taken a mature and thoughtful approach to risk. With this in mind, we're being intentional, strategic, and disciplined with how we utilize capital. We will continue to invest in enhancing our core product offerings and activating with partners. But at the same time, we will be even more prudent in our cash usage and optimize the business by simplifying processes and driving productivity. Now moving on to the Bax platform. Our platform is unique and offers businesses scaled consumer experiences across crypto and loyalty. It is underpinned by our institutional-grade technology stack. Our services span from buy, sell, hold crypto, significantly further scaled with the addition of Apex crypto, to our loyalty solutions, which offer access to merchandise, travel, and Apple products. fully customizable by our partners. We provide valuable experiences for our partners within these defined product areas. Our platform is very focused on doing these well because we've seen that they resonate in the marketplace and are positioned to scale quickly. We continue to drive simplification in our product suite and leaning into products that have significant consumer demand and a clear path to profitability. Not only are each of these offerings powerful individually, but they're also rich opportunities for crypto and loyalty to work in tandem, like with our crypto rewards. As the narrative around crypto continues to develop, we believe it will be increasingly viewed as more than just an investable asset and move to widespread utility across consumers, businesses, and institutions. We're still very early in the stages of the kind of utility adoption that Bakkt is looking to drive. Our complementary crypto and loyalty solutions position us for any market environment. Loyalty programs are extremely relevant in tough markets as consumers look to rewards programs to offset costs. We've seen this with consumer spending behaviors on our loyalty platforms. Businesses are looking for opportunities to offer more to their customers during this time. So let's dig in deeper into some of the things that we've been working on. I'm incredibly excited that we've entered into a definitive agreement to acquire Apex Crypto from Apex FinTech Solutions. Apex Crypto has more than 30 crypto trading clients, including leading FinTechs, and the addition of these clients to our already robust platform will enable us to scale faster, reach new client segments and offer advanced crypto solutions sooner to earn significant revenue and bolster our path to profitability. We also continue to grow our organic business, building out our product roadmaps and working with our partners to co-market and activate in the market. With Fiserv, we're continuing to accelerate our sales and marketing initiatives and expand our relationship with their sales team to build pipeline across products. So this means ongoing webinars, thought leadership content, and other opportunities where we are jointly participating to educate their teams and their clients. We continue to invest in backed loyalty solutions, and we've expanded our storefronts to provide customer choice across travel and merchandise. This includes expanded content options from a number of name brands' partners, including shop premium outlets, to meet customer demand for more redemption opportunities. We activated instant funding to enable quicker consumer flows into the backed ecosystem. This update has already resulted in increased conversion and transaction rates. For example, we've seen new users are over 10 times more likely to link a debit card as a funding source versus a bank account. And new users that link a debit card are more than two times more likely to buy crypto versus users that link a bank account. We're extremely excited by our acquisition of APEX Crypto. This is a unique asset that is complementary to the BAC platform. The acquisition significantly accelerates our crypto strategy, providing immediate revenue generation and opening the doors to meaningful new client verticals. This deal provides scale in differentiated client segments and meaningful transaction volume with more than 30 partners. It enables us to offer new and expanded crypto capabilities more quickly to our clients, as well as grow in segments where we're not already present. We also get to welcome talented individuals with expertise across crypto engineering, technology, and trading to further deepen our bench. This deal is transformational for our company. With the addition of Apex Crypto to our platform, we are poised to be a crypto provider of choice across industries for financial institutions, fintechs, merchants, and loyalty programs. This adds significantly to our capabilities and leapfrogs our roadmaps to be able to offer advanced features to new and existing clients. The structure of this deal is extremely financially attractive. As we've shared, the initial payment is $55 million in cash with up to $145 million in back stock and seller notes, all depending on the achievement of financial targets by the acquired business through to 2025. The structure of this deal is intentional. If the acquired business meets its financial targets and additional purchase price is paid, it's beneficial to Bakkt and our overall revenue picture. The deal is expected to be accretive and will have a significant impact on our crypto revenue upon close. As we've said, we expect this transaction to bolster our path to profitability. So let's look more closely at what that really means. Our acquisition of Apex Crypto will be accretive to EPS, free cash flow, and our revenue growth rate. We expect the addition of APEX crypto business to be accretive to adjusted EPS in the full year following deal close. We are targeting an operating margin expansion in 2023 of at least 20%. Excluding deal costs, we expect free cash flow of $18 million through 2025 from the acquisition and associated restructuring initiatives. We also expect meaningful cash savings in the range of 20 to $25 million from this transaction through 2025, primarily driven by headcount and technology efficiencies. Our revenue opportunities will only continue to grow as we expect to double the 30 active partnerships through 2024 leveraging the APEX pipeline. We're excited by the significant financial benefits from the transaction in driving incremental revenue and growing our operating margin. As I shared, the structure of this deal maximizes the financial benefit to BACT and incentivize APEX FinTech solutions for ongoing involvement. Aside from the cash payment of $55 million at closing, The purchase price includes contingent consideration of up to $145 million of back stock and seller notes to Apex Fintech Solutions based on achieving financial targets that drive significant incremental revenue to Bakkt. The transactional value of this deal is clearly linked to the financial performance of the Apex crypto business. The contingent earn-out gross profit growth targets are robust, with year-over-year growth targeted at more than 175% in 2023 and more than 50% in 2024. We believe these earn-out targets for Apex Crypto are appropriately aggressive and ensure that this transaction provides the right returns for our shareholders. Apex Crypto must achieve these full-year gross profit growth targets to receive the full amount of back stock issuance laid out in the deal terms. Gross profit growth below these targets would result in proportionally lower amounts of stock issuance or no issuance at all if below 25% of the earner. These growth targets were established to be accretive to EPS and we feel confident that this deal will show its impact on Bakkt immediately upon closing. Now let's go deeper on APEX Crypto's capabilities and how they will enhance our platform and accelerate our product roadmap. With the acquisition, we will offer more than 30 coins with partners having the ability to choose the coins offered to their customers. Along with seamless deposits and withdrawals with open-loop functionality for Bitcoin, Bitcoin Cash, and Litecoin, we will also be able to offer staking capabilities for a limited number of coins. Staking enables consumers to earn passive income from the crypto that they hold, a very attractive capability for many who are transacting in crypto today and a capability that we expect to become increasingly relevant going forward. We will also be able to offer access to NFTs through an order management system that accepts payment in fiat currency. This removes the friction from how NFTs transact today and enables more widespread adoption and applicability to a much broader range of consumers. Apex Crypto comes from a heritage of deep trading expertise, and we're excited to harness their proprietary best bid offer systems and limited order technology for our clients. And we will have access to additional liquidity providers, enabling deep market access and a more competitive pricing to customers. These capabilities are attractive to new and existing partners and will be able to continually build upon this strong foundation and offer more features to extensive client verticals. These new capabilities greatly accelerate our product roadmap. By adding them to our platform, we can scale back on the investments we have been making here and streamline the resources that we need to achieve our goals. APEX Crypto's platform is highly complementary to ours. APEX Crypto enhances our current buy-sell-hold solution with additional coins and more advanced order and trading. It significantly expands our crypto client base into a number of new and rapidly growing client verticals, such as FinTech, app trading platforms, and neobanks. We will also be able to bring back strength to the client's apex crypto currently serves. From new customer experiences, crypto payments, royalty offerings, and custody, we are positioned to continue scaling our joint capabilities to a broader universe of businesses, pulling from each platform strength where it makes the most sense and creating a more differentiated product offering that has scale and depth. APEX Crypto provides an attractive addressable market. APEX Crypto already has approximately 5 million crypto enabled accounts, and we expect to continue to add more volume to the platform with future growth potential to backs other products and services to deepen these customer relationships. Through APEX FinTech solutions, we will jointly target more than 220 clients to grow future revenue together. Their network is another important growth factor going forward. The customer demographic these FinTechs are serving represents a huge opportunity. According to Data.ai, over 50% of customers to top fintech firms are millennials or Gen Z. And according to Morning Consult research, millennials and Gen Zs represent the most crypto ownership in the US, comprising 60% of the crypto space. This group of customers are more interested in crypto overall and trade much more frequently than other customer segments. The fintechs and neobanks in this segment are also moving more quickly to offer crypto access to their customers. So we expect to grow in this segment faster. This acquisition provides value to all stakeholders of Bakkt and Apex Crypto. The partners we've spoken with already identify this as an exciting new chapter. We'll be able to provide a broader product offering speed to market of new features, and a single B2B2C platform for crypto and more. Consumers will get earlier access to new products and features along with highly competitive pricing and more opportunities to engage in the crypto economy from one destination. For shareholders, this is immediately financially impactful, accretive to EPS, free cash flow, and revenue growth. bolstering our path to profitability. It also enables us to focus the business to maximize the accretive nature of the deal, which includes the talented people we're bringing on. Karen will get into this more deeply, but we expect to implement a restructuring plan in the fourth quarter. In addition to the acquisition, we've made a lot of necessary investments in our platform in 2022, which enables us to simplify and focus on the core capabilities that we know are critical to our strategy. We're just so excited to welcome APEX Crypto team members with expertise across trading, technology and crypto to Bakkt. We have a strong alignment across our cultures, both passionate about innovation and delivery in crypto. There are so many elements of this deal that have natural synergy to the backed platform and alignment to our business. I just can't wait to share more on the progress we'll make together. So let's move on to additional strategic highlights from our business. Going deeper on global payments. We're excited to be making progress on our multifaceted partnership to bring crypto access and utility to the global payments network. We're working with their teams across engineering, sales, marketing, and product. Our integration work is complete for Crypto Connect and Crypto Rewards, which sets us up to collaborate on additional use cases. We've launched a pilot for NetSpend employees to buy crypto through NetSpend with our crypto capabilities. We're also working closely with Teasys on go-to-market for Crypto Rewards. In Q3, we significantly expanded our sales presence, targeting key partner verticals supported through a refreshed brand, which brings our B2B2C strategy to life, positioning BACT as a supporter of partner experiences. We've been expanding marketing initiatives to build awareness and to generate more leads, and we're already seeing strong traction with average monthly qualified leads more than doubling since the beginning of this year. We continue to see interest in the market related to crypto and custody services, even with a slightly longer buying cycle. Our conversation in these channels are providing valuable insights into opportunities for crypto as a form of utility. The narrative for crypto is clearly shifting and we can help our partners stay ahead of these emerging trends. And with that, I'll pass it to our CFO, Karen Alexander, to review our financial results for the quarter.